Trans-Pacific Trade Deal Could Revolutionize Commerce: View

By the Editors -
Nov 10, 2011

President Barack Obama travels to
Honolulu this weekend to meet with the 21-nation Asia-Pacific
Economic Cooperation bloc. The president hopes to advance a
trade deal few know about but that could shape the future of
U.S. commercial relations overall, and with fast-growing Asia in
particular. It also offers the U.S. a chance to pivot from
austerity politics to economic revival.

Obama hopes to do all that through the Trans-Pacific
Partnership, a deal now being negotiated that would unite the
U.S., Australia, Brunei, Chile, Malaysia, New Zealand, Peru,
Singapore and Vietnam in a single free-trade community. TPP
would lower tariffs and other trade barriers among the nine
countries. The U.S. hopes the promise of open access will entice
Canada, Indonesia, Japan, Mexico and others to join and
eventually extend the free-trade zone throughout the Pacific
Rim.

TPP is important because the U.S. this year exported more
to Pacific Rim countries than to Europe, according to the
Commerce Department. As Bloomberg News has pointed out, U.S.
companies sell more to South Korea than to France, and more to
Taiwan than Italy. Last year, exports to the region supported
850,000 U.S. jobs.

But TPP also promises something truly revolutionary:
persuading Asian governments to accept new rules of the road for
state-owned enterprises, a hallmark of Asian-style capitalism.
In return, the U.S. will probably be asked to drop some of its
own protectionist barriers, beyond lowering tariffs.

Profit and Power

Asian governments operate in many markets through state-
owned companies with large bundles of cash reserves or valuable
natural resources at their disposal. They exist both to make a
profit and to build state power.

Ten years ago, emerging countries added $100 billion a year
combined to their reserves. In 2009, they took in $1.6 trillion.
Sovereign wealth funds now control 12 percent of investment
worldwide, according to the U.S. State Department.

There are real risks to this model. Sometimes, state-owned
enterprises work in secrecy and without accountability to
shareholders, independent boards and regulators. The lack of
transparency puts U.S. companies at a disadvantage.

At other times, state-run companies abuse their power, as
Russia did in 2006 when Gazprom, in a disagreement over how much
money it was owed, tightened gas supplies to Ukraine in the dead
of winter. Similarly, China in 2010 restricted Japan’s access to
critical minerals after a dispute over a collision between a
Chinese fishing boat and a Japanese coast guard vessel.

One of TPP’s goals is to win binding commitments to prevent
such retaliatory actions, and to set out basic principles of
market behavior. For the U.S., the trick is defining a state-
owned enterprise. Define it too broadly and Boeing Corp., which
receives billions in Pentagon funds to build aircraft and
weapons systems, might be construed as state-owned. Define it
narrowly and many companies that are national champions -- and
receive large state subsidies -- might not be included.

The answer may lie with a test that trade mavens call
“effective influence.” In essence, that means determining who
controls spending, investment and management decisions, and who
names the chairman and chief executive officer. In Boeing’s
case, that’s most definitely not the U.S. government.

TPP is also forcing U.S. negotiators to confront their own
protectionist laws and rules. Foreign ownership of U.S.
airlines, for example, is limited by law to 25 percent of voting
shares. Quotas and tariffs shield American farmers and ethanol
producers from overseas competitors.

There are other hurdles, all predictable: Patents, labor
rights, environmental protections and tariffs that protect
domestic industries have been contentious in the TPP talks. But
with the recent completion of the South Korea, Colombia and
Panama deals, which involved many of the same issues, U.S.
negotiators ought to be able to resolve these frictions quickly.

Elephant in Room

The elephant in the room is China. For now, China isn’t in
the TPP’s sights, except to establish that its unique form of
capitalism won’t be in the TPP template. The U.S. will push the
partnership to eschew currency manipulation, Internet
censorship, forced intellectual-property sharing and coerced
joint ventures with state-owned companies. If the rest of Asia
moves closer to the U.S. model, that could pressure China to do
the same.

Obama should push for a mid-2012 deadline to complete the
treaty at this weekend’s APEC meeting and at the East Asia
Summit on Nov. 18-19 in Bali. If that happens, he could begin a
new round of global economic growth. That would do far more to
create jobs, build wealth and balance budgets in the coming
decades than the destructive spending cuts now in the works.